Sloan Bobrick Oldfield & Helsdon, P.S.
Electronic Newsletter
January 3, 2006

Ladies and Gentlemen:

Happy New Year!

As we were in 2005, Sloan Bobrick Oldfield & Helsdon, P.S. is dedicated to giving you the latest real estate legal news from the Legislature and the Washington and Federal Courts, so that you can better serve your clients and yourselves in the coming year.

We have expanded our ability to give you the benefit of our legal knowledge.

This is our first installment of electronic newsletters for 2006.

Court of Appeals Protects Real Estate Partnership from Creditor

The Washington Court of Appeals decided, on December 1, 2005, when a judgment creditor can reach the ownership of real property when the creditor has a judgment against only one partner.

On July 8, 1992, Joseph Bills and James Teply executed a partnership agreement for the purpose of purchasing and holding real estate.  The partners acquired residential property as ‘co-partners’ by quit claim deed.  The deed was recorded in July 1992.

The agreement set forth that profits and losses of the partnership and any distributions therefrom were to be allocated according to their percentage of ownership, each initially having a 50 percent share.

In May 2000, a judgment was entered against Joseph Bills.  Three years later, through a series of assignments, SUNSH9, LLC.  became the holder of the judgment.  SUNSH9 sought to execute against the residential property pursuant to its belief that the property was not a partnership asset, but property co-owned by Bills.

The trial court entered an Order Directing Sale of Homestead Property. SUNSH9 sought to modify the order directing sale of property to remove the homestead designation.  At the hearing, Teply and Bills asserted that they were co-partners under the 1992 partnership agreement, and that the partnership owned the property.  Thus, they claimed the property was not subject to execution as Bills’ separate property.

In turn, SUNSH9 sought the court’s determination that the property was not partnership property, contesting whether the partnership was formed for a business purpose or for profit.  The trial court orally denied SUNSH9’s motion, and determined that the property was a partnership asset.

Therefore, the court determined the property was a partnership asset at the time the judgment was taken, and Bills did not have an individual co-ownership interest which could be reached by execution of the judgment lien.  SUNSH9 sought reconsideration, which was denied.  SUNSH9 appealed.

SUNSH9 relied on RCW 25.05.055(3)(a) arguing that the statute requires a showing of some active carrying on of business as set apart from the passive co-ownership of property, especially where, as here, the property is also used as a residence.

The Court of Appeals noted that “it is not essential to the existence of a partnership that business have actually been carried on.  An agreement to carry it on creates the partnership . . . . Bills and Teply’s 1992 partnership agreement states that the purpose of the partnership ‘shall be to acquire, own, develop, mortgage, lease, sell or otherwise dispose of land located at . . . Seattle, King County, Washington, to finance and construct or cause to be constructed improvements thereon, and to do anything necessary or incidental to the foregoing.’  There is no dispute that this may be a legitimate business purpose.”

SUNSH9 made much of the fact that the partners had passive co-ownership in real property in which they reside, and that this is not the carrying on of a business.  Contrary to SUNSH9’s argument, RCW 25.05.055(3)(a) does not state that ‘passive co-ownership {of property} does not ‘by itself establish a partnership,’ even if the co-owners share profits made by the use of the property.’

In this case, the Seattle property was acquired not in a partnership name, but in the name of both partners, in the capacity of co-partners.  This was indicated on the deed, thus qualifying as partnership property under RCW 25.05.065(1)(b).

The Court of Appeals further stated: “[h]ere, the record, while somewhat minimal, supports the determination that Bills and Teply entered into a business relationship to invest in real estate under their partnership agreement.

No evidence or claim has been made that the partnership agreement was entered into for fraudulent reasons or that the partnership was created as a sham.  While additional evidence regarding the ongoing business purpose might have been desirable in this case, under the circumstances, the evidence shows that a partnership existed for a business purpose, with the properties as partnership assets.

SUNSH9 asserted that the property was not purchased with partnership funds already in existence.  There is no requirement that partnership property must be so purchased.  The character of the property is determined by the understanding and intent of the partners at the time the partnership is created.  Contrary to the claim of SUNSH9, the property was acquired with partnership assets; to wit, the initial capital contributions of the two partners, even though one of those contributions was through use of a promissory note.  Under RCW 25.05.060, ‘{p}roperty acquired by a partnership is property of the partnership and not of the partners individually.’  Whether a co-partner is liable for obligations of the other depends on whether a wrong was committed within the scope of partnership agency or within the reasonable scope of the business of the partnership.  In order to bind the partners or the partnership, the obligation must be within the scope of the partnership business.

The decision of the trial court is affirmed.”